Case Study — Office Building
Office buildings vary in the level of qualified property they are made up of. However, to some extent all office buildings will have a certain level of qualified millwork, floor and wall coverings, dedicated electrical for office equipment (wiring, conduit & receptacles), dedicated plumbing work for employee break areas, land improvements outside such as storm water systems, certain excavation, asphalt, concrete curbs and sidewalks, parking lot lighting/dedicated electrical and landscaping & irrigation. Some office buildings will have extensive decorative millwork, additional cabinetry and countertops, decorative lighting and the related electrical work to this lighting, supplementary HVAC systems for computer rooms and raised flooring. The best method for identifying all qualified property is the use of a cost segregation study where an engineer and CPA work together to identify and classify all qualified property.
Please note that qualified property, land improvements and personal property are terms used to describe costs in the real estate that can be written off more quickly for tax purposes.
Office Building Example
- Cost of Property (Excluding land): $900,000
- Constructed and placed in service in 2005
In this case study done for tax year 2006, the office building had a total cost of $900,000, not including land. Through cost segregation analysis, the owner was able to re-classify 10% of the total costs to either 5 or 7 year property and 18% of the total costs to 15 year property. This resulted in a Net Present Value After Tax Benefit of over $40,000. The additional depreciation in the first year of the study was approximately $61,000.
The tax savings in the first year assuming a tax rate of 39% was over $23,000.
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*Net Present Value is a calculation that shows the combined benefits of a cost segregation study over the remaining tax life of the property. The combined benefits each year are adjusted back to today's dollars using a 7% discount factor. This allows our clients to compare the total benefits in today's dollars to the fee of our services.
